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Global Asset Pricing: Is There a Role for Long-run Consumption Risk?

Author

Listed:
  • Jesper Rangvid

    (Copenhagen Business School)

  • Maik Schmeling

    (Department of Economics, Leibniz University Hannover)

  • Andreas Schrimpf

    (School of Economics and Management and CREATES)

Abstract
We estimate long-run consumption-based asset pricing models using a comprehensive set of international test assets, including broad equity market portfolios, international value/growth portfolios, and international bond portfolios. We find that differences in returns across assets within a country are sometimes (and most prominently for the U.S.) better captured by the assets' exposure to long-run consumption risk as opposed to their exposure to one-period changes in consumption (the canonical consumption CAPM). Across countries, however, exposure to long-run consumption risk does not provide a better fit than the canonical consumption CAPM. Thus, when characterizing the cross-country distribution of returns, long-run consumption risk does not seem to play any particular role, even if long-run risk is important for explaining the cross section of expected returns in the U.S. Furthermore, we show that consumption growth is more predictable over short to medium-run horizons than over longer horizons and that empirical evidence of a declining risk aversion parameter estimate in long-run risk models has to be interpreted with care.

Suggested Citation

  • Jesper Rangvid & Maik Schmeling & Andreas Schrimpf, 2009. "Global Asset Pricing: Is There a Role for Long-run Consumption Risk?," CREATES Research Papers 2009-57, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2009-57
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    File URL: https://repec.econ.au.dk/repec/creates/rp/09/rp09_57.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Stefano d¡¦Addona, 2018. "Rational Ignorance in Long-run Risk Models," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 17(1), pages 43-54, June.
    2. Stefano d¡¦Addona, 2018. "Rational Ignorance in Long-run Risk Models," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 17(1), pages 43-54, June.

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    More about this item

    Keywords

    International Asset Pricing; Long-run Consumption Risk;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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